Mystery shrouds postal service deal with Amazon

(MoneyWatch) Mystery surrounds the deal announced Monday between Amazon.com (AMZN)
and the U.S. Postal Service to add Sunday package delivery, which is
prompting some analysts to speculate on the profitability of the
arrangement.

"They negotiated this in complete secrecy, under a seal from the
Postal Regulatory Commission," said Bill McAllister, a reporter who
covers the U.S. Postal Service for trade publication Linn's Stamp News.

Postal carriers will begin delivering Amazon packages this Sunday in
the New York and Los Angeles metropolitan areas. The program is set to
expand to "a large portion of the U.S. population" in 2014, according to
a statement from Amazon.

Neither party would disclose details of the financial arrangement,
leaving insiders like McAllister wondering, "Can one company generate
enough revenue to justify this venture? It's obvious that the postal
service thinks it can. I just didn't see that much business."

When questioned in an interview with CBS Radio News on the specifics
of the deal, U.S. Postmaster General Patrick Donahoe said, "These are
contracts terms that we set up. That's proprietary information as far as
the pricing goes."

This lack of transparency comes as no surprise to eCommerce and
retail expert Sucharita Mulpuru at Forrester Research, who said Amazon
likely has competitive reasons for keeping the details under wraps.
"This gives them negotiating leverage with UPS (UPS) and Fedex (FDX), too, if those guys want to get into the game and be a part of this as well."

So who profits in this deal? Not Amazon, according to Mulpuru. "They
are absolutely taking a hit on this. No question." But in offering
Sunday delivery, she said, Amazon is looking at the bigger, longer-term
picture in trying to gain market share and encourage customers to shop
more.

Meanwhile, for the postal service "it's a win-win," said postal
service expert Rick Geddes, an associate professor at Cornell
University. "This is a step towards a more commercialized postal service
that is going to have to occur if the postal service is going to remain
viable in the new, dynamic, electronic communications marketplace."

Although
he would not go into details, Donahoe said the commercial arrangement
with Amazon would generate profits for the postal service. "We're making
money on it," he said, "absolutely."

The USPS has been struggling financially for a number of years. Last
year it posted a $15.9 billion loss, and reported billions more in
losses in the first few quarters of 2013. Geddes said there are only two
ways of digging out of that hole -- raising revenue or lowering costs,
and both have been a struggle.

In February, Donahoe met with resistance from lawmakers when he asked
to scale back mail delivery to five days a week. The postal service is
also limited when it comes to raising revenue. "By law," Donahoe told
CBS Radio News, "we are capped at the rate of inflation for any letter
mail, so we can't raise prices."

Could the deal with Amazon could be the first of more public-private
partnerships as the postal service tries to turn its finances around?
Likely, said Geddes.

That seemed to be the focus for the Postmaster General in announcing
the partnership with Amazon. "The future of the postal service will be
seven-day package delivery," Donahoe said. "We've got to figure out how
to grow this business in order to keep the postal service afloat for all
of America."